Impact on services provided to branches outside India under GST

Many Companies in India have branches outside India. It is a common practice for such Companies to provide services to its branches outside India. However, such companies should be aware of the GST impact on the services provided to the overseas branches.

In this article the author has analyzed the impact of GST on such transactions with overseas branches.

Supply of services to overseas branches for the period 01.07.2017 to 25.07.2018:

Whether supply of services to overseas branches would be considered as export of services?

For a supply to be considered as an export of service, it should satisfy the following conditions laid down in section 2(6) of the IGST Act:

1. the supplier of service is located in India;
2. the recipient of service is located outside India;
3. the place of supply of service is outside India;
4. the payment for such service has been received by the supplier of service in convertible foreign exchange; and
5. the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1insection 8;

As per Explanation 1 to section 8 of the IGST Act,2017, for the purpose of this act, where a person has,

1. an establishment in India and any other establishment outside India;
2. an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
3. an establishment in a State or Union territory and any other establishmentbeing a business vertical registered within that State or Union territory,

then such establishments shall be treated as establishments of distinct persons.

Hence as per the above explanation, the head office in India and the overseas branch would be treated as distinct persons and hence, even if the other conditions of export of service are satisfied, the same would not qualify as export.

Basis the above, it is clear that any entity providing services to overseas branch would be required to discharge GST at the applicable rate, which would end up being a cost to the Company. Valuation for this purpose would be the open market value as per rule 28 of the CGST Rules.

For Eg. A company in India provides services to its branch in Belgium for a value of Rs.1,00,000/-. In this case, the company would be required to discharge GST of Rs.18000. (Rs.1,00,000 *18%)

Supply of services to overseas branches from 26.07.2018

As per Notification No. 15/2018 Integrated Tax (Rate) dt. 26.07.2018, services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as establishments of distinct persons in accordance with Explanation 1 in section 8 of the Integrated Goods and Services Tax Act, 2017 would be exempt from GST provided the place of supply of the service is outside India in accordance with section 13 of the IGST Act,2017.

Hence by virtue of the above notification, any services provided to overseas branch would be exempt from tax, if the place of supply is outside India.

However, in case of an exempt supply, the point to be considered is the impact of ITC on account of such exempt supply.

As per section 17(2) of the CGST Act, 2017 where the good or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax so attributable to the said taxable supplies including zero-rated supplies.

Hence the entity would be required to reverse input tax credit attributable to the exempt supply and other common input tax credit in proportion to the total turnover.

For Example: A company in India provides services to its branch in Belgium for a consideration of Rs.1,00,000/-. The Company has other taxable supply of Rs.2,00,000/-.  Input attributable to exempt supply (branch billing) is Rs.10,000/-, Common input tax credit is Rs.15,000/-

Common ITC attributable to exempt supplies to be calculated as

= Common ITC*Exempt Turnover/Total Turnover

= 15000*100000/300000= 5,000/-

Valuation on transactions with Branches outside India:

Further, one has to consider the valuation provisions as per Rule 28 of the CGST Rules, 2017 since it is a transaction between distinct persons and hence the valuation needs to be validated in terms of the said rule. As per Rule 28 of the CGST Rules,2017 in case of transactions with distinct person the valuation of such transaction shall be

(a) be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as

determined by the application of rule 30 or rule 31, in that order

The benefit of second proviso to the said rule (i.e. situation where the amount charged in invoice is considered as open market value) would not be available, since the overseas branch would not be eligible to avail ITC of GST charged.

Conclusion:

It can thus be seen that though no GST is required to be paid on the services provided to establishments outside India, reversal of ITC attributable to such supplies would have to be ensured, which will result in additional cost to the company.

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